Symmetrical Information and Credit Rationing: Graphical Demonstrations

As this article shows, the pro-debtor U.S. Bankruptcy Code alone can cause credit rationing, even without asymmetrical information in the market, because the code entails substantial costs to lenders if borrowers file for bankruptcy. In the absence of bankruptcy cost, lenders are always justified in raising interest rates and clearing markets. If the bankruptcy cost is nontrivial, however, lenders' profits are concave in the relevant range of interest rates. Thus, lenders cannot always clear the market by using higher rates. The study reported here also found that the use of collateral in debt contracts can reduce rationing but that even 100 percent collateral does not eliminate all rationing possibilities. A positive relationship was found between credit risk and the amount of pledged collateral, which is not necessarily true with models based on asymmetrical information.Company Failures; Credit Control; Debt

Consumer bankruptcy: how unsecured lenders fare

On September 8, 2003, the Payment Cards Center of the Federal Reserve Bank of Philadelphia hosted a workshop on consumer bankruptcy and its effect on unsecured lenders. Professor Melissa Jacoby of Temple University’s School of Law led the workshop. A leading bankruptcy scholar, Jacoby described the current bankruptcy system and the potential impact of Chapter 7 reforms on the rights of unsecured creditors. This paper summarizes Jacoby’s presentation and the ensuing discussion. It offers a brief overview of consumer bankruptcy and the rights of unsecured creditors that lend money to individuals who ultimately file for bankruptcy. ; It also discusses the proposed amendments to the bankruptcy code being debated in Congress. Finally, the paper concludes with Jacoby’s assessment of how unsecured lenders, such as credit card issuers, would likely be treated in the proposed system.Bankruptcy

Restoring Bankruptcy’s Fresh Start

The discharge injunction, which allows former debtors to be free from any efforts to collect former debt, is a primary feature of bankruptcy law in the United States. When creditors have systemically violated debtors’ discharge injunctions, some debtors have attempted to challenge those creditors through a class action lawsuit in bankruptcy court. However, the pervasiveness of class-waiving arbitration clauses likely prevents those debtors from disputing discharge injunction violations outside of binding, individual arbitration. This Note first discusses areas of disagreement regarding how former debtors may enforce their discharge injunctions. Then, it examines the types of disputes that allow debtors to collectivize in bankruptcy court. Without seeking to resolve either disagreement, this Note assumes debtors may collectivize in this context and employs an “inherent conflict” test that looks to whether disputes over discharge injunction violations are arbitrable. Because the “inherent conflict” test likely leads to the conclusion that courts must enforce class-waiving arbitration clauses, this Note argues that Congress should amend the Bankruptcy Code not only to provide debtors an express right of action under § 524 and the ability to collectivize, but also to prohibit the arbitration of these claims. Doing so will give full effect to the discharge injunction and fulfill the promise to debtors that they can truly begin anew after bankruptcy

The Failed Reform: Congressional Crackdown on Repeat Chapter 13 Bankruptcy Filers

After decades of lobbying to “get tough” on bankruptcy repeat filers, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The Bankruptcy Code now requires that the automatic stay, which prevents creditors from pursuing the property of bankruptcy debtors, expires after thirty days for petitioners who file for bankruptcy within one year of a previously failed petition. Debtors can file a motion to extend the stay, but there is a presumption of a bad faith filing, only overcome if a debtor can show there has been a “substantial change in his or her financial or personal affairs” that makes discharge likely. Despite the Congressional focus on repeat filers, there has been little scholarly study of them. This study uses a national random sample to analyze post-BAPCPA repeat filers. I find that even post-BAPCPA, there is a significant number of repeat filers. Indeed, 14.7% of all bankruptcy petitions filed in 2007 were repeaters, and of Chapter 13 repeat filers, 69% filed a new petition within a year after a previous petition’s failure. Further, the strict new Congressional rules for repeat filers have effected little practical change: 98% of petitions to extend the automatic stay are granted, even though the majority of repeat filers provide no evidence of changed circumstances. Based on these findings, interviews with bankruptcy judges, trustees, and lawyers, and analysis of relevant case law, I explain why BAPCPA’s crack-down on repeat filers has effected little practical change, and argue that effectively tackling the refiler problem will likely require very different tactics than those employed in BAPCPA

Rethinking Freedom of Contract: A Bankruptcy Paradigm

This Article tests the limits of private contracting by examining what it means to contract about bankruptcy. Bankruptcy law if governed by a statutory code that defines the relationship between debtors and creditors when a debtor enters the bankruptcy regulatory scheme. May debtors and creditors contract in advance to change that relationship? Or would these contracts be Faustian bargains that the state should not enforce? Both courts and scholars are in conflict, yet the answer is critical because it affects not only bankruptcy costs but also the structuring of corporate reorganizations and securitization transactions. I maintain that the threshold question--what freedom should parties or should not be allowed to contractually alter statutory schemes. I then apply those principles to a model of prebankruptcy contracting by taking into account the policies underlying the bankruptcy code and also by analyzing the extent to which, under contract law, externalities should render a contract unenforceable. I conclude that, within defined limits, bankruptcy law should be viewed as default provisions and not as mandatory rules. Finally I show that my model of prebankruptcy contracting can have important applications, not only to making corporate reorganizations and securitizations transactions more efficient but also to understanding when parties should be allowed to contract about statutory schemes generally and when externalities should override freedom of contract

Case Against Supplemental Bankruptcy Jurisdiction: A Constitutional, Statutory, and Policy Analysis

In this Article Professor Block-Lieb critically examines the power of a federal district or bankruptcy court to adjudicate jurisdictionally insufficient claims which arise out of a common nucleus of operative fact with a proceeding which “arises under” the Bankruptcy Code, or “arises in” or “relates to” a bankruptcy case. After considering Article III of the United States Constitution, relevant statutory provisions--including the newly enacted supplemental jurisdictional provision (28 U.S.C. § 1367)-- and the conflicting policy objectives of these statutory provisions, the Article concludes that a district court\u27s adjudication of supplemental claims related to a “related to” proceeding may be unconstitutional, unauthorized by statute, and inconsistent with the primary purpose of bankruptcy jurisdiction--the efficient administration of a bankruptcy estate. As to a district court\u27s exercise of jurisdiction over supplemental claims related to an “arising under” or “arising in” proceeding, it proposes that a balancing approach be adopted. It also contends that additional constitutional concerns are raised when a non-Article III bankruptcy court exercises any form of supplemental bankruptcy jurisdiction, and advocates limiting the power of bankruptcy courts accordingly

The homeownership experience of households in bankruptcy

This paper provides the first in-depth analysis of the homeownership experience of households in bankruptcy. The authors consider households who are homeowners at the time of filing. These households are typically seriously delinquent on their mortgages at the time of filing. The authors measure how often they end up losing their houses in foreclosure, the time between bankruptcy filing and foreclosure sale, and the foreclosure sale price. In particular, they follow homeowners who filed for chapter 13 bankruptcy between 2001 and 2002 in New Castle County, Delaware, through October 2007. They present three main findings. First, close to 30 percent of the filers lost their houses in foreclosure despite filing for bankruptcy. The rate rose to over 40 percent for those who were 12 months or more behind on their mortgage payment, about the same fraction as among those who entered into foreclosure directly. Second, filing for bankruptcy allowed those who eventually lost their houses to foreclosure to remain in their houses for, on average, an additional year. Third, although the average final sale price exceeded borrowers’ own estimates at the time of filing, the majority of the lenders suffered losses. These findings are pertinent to the recent debate over the bankruptcy code on mortgage modification. Finally, the paper also reports circumstances related to the loan, borrower, and lender that make it more or less likely that a certain result will take place.Home ownership ; Bankruptcy

Goodbye to Chapter 11: The end of business bankruptcy as we know it

Paper considering the business reorganisation introduced under Chapter 11 of the United States Bankruptcy Code. The author examines the intended purpose of Chapter 11 and asserts that this chapter was once used to preserve the interests of equity owners, while now it is used to preserve the value of assets. Article by John D. Ayer (Professor of Law, University of California at Davis; Fellow, American College of Bankruptcy). Published in Amicus Curiae - Journal of the Institute of Advanced Legal Studies and its Society for Advanced Legal Studies. The Journal is produced by the Society for Advanced Legal Studies at the Institute of Advanced Legal Studies, University of London

Does the law alone explain the rise in bankruptcies in XIXth century France?

This paper is the first result of a project aiming at understanding the history of bankruptcy law from an empirical economic perspective. By contrast with some proponents of "law and economics" (e.g. La Porta & alii, 1998), we consider that the impact of bankruptcy law on national economic performance cannot be deducted a priori from a simple description of the law, but can only be measured examining actual court practices and economic agents' behaviour. First of all, we believe that an empirical assessment of bankruptcy must start with a better understanding of what determines the proportions of debtor-creditors relationships which end-up in court (contrasting with those settled outside the courts, see Klapper, 2001). This simple question, which is not usually discussed, is a precondition for any interpretation of aggregate bankruptcy statistics. In this paper, we try to measure the impact of the changes in French bankruptcy law in the XIXth century focusing on the behaviour of economic agents as users of bankruptcy law for the sake of finding the best solution to their economic problems. Debtors used bankruptcy law in order to minimize their debt level when facing difficulties in servicing it, but they had to convince their creditors and/or the courts of their good faith, and faced the adverse effects of bankruptcy on their reputation and on the smooth functioning of their business. Creditors used bankruptcy law in order to force their debtors to pay, if they could. We use a new and still incomplete database constructed using both the yearly official statistics produced by the judicial system from 1830 on, and individual bankruptcy files from the Paris commercial court (Tribunal de commerce) archives in order to measure actual practices. The first part of the paper presents the evolution of French bankruptcy law during the XIXth century in its historical context. The second part briefly describes the theoretical model we use in order to understand the choices facing debtors and creditors in the face of financial distress. The last part proposes some major stylized facts concerning bankruptcies during that period and tries to understand their relationship with the legal evolution described before.history ; business law ; bankruptcy ; credit ; small and medium businesses ; commercial courts ; financial distress ; private settlement ; France ; 19th century ; code de commerce

Puerto Rico v. Franklin California Tax-Free Trust: Congressional Intent Interpreted Through a Plain Reading of the Federal Bankruptcy Code

In Puerto Rico v. Franklin California Tax-Free Trust, the Supreme Court held that Puerto Rico’s Recovery Act was pre-empted by federal law. While the Majority’s method of interpreting the plain language of the Bankruptcy Code was the correct course of action, additional notable interpretations and policy arguments were raised in regards to the Bankruptcy Code itself as well as this holding’s implications on the citizens of Puerto Rico. However, while Puerto Rico and the Dissent may not have found solace through the judiciary’s resolution in this matter, Congress’ swift passing of PROMESA has provided Puerto Rico with an initial opportunity to address its current financial situation